Monday, 31 May 2010

Unbridled arrogance

Copperbelt Mining Agricultural and Commercial Show (CMACS) chairperson William Osborn just does not get it :

Osborn further said if a fair system of taxing the mining industry on profits could be devised on the basis of negotiation, everyone could benefit. He said the government would realise more revenue that could be spent on improving some of the dilapidated infrastructure on the Copperbelt. “If government invested money on the railway system in the country, this would save the mining companies an enormous amount of transport cost and in turn save the government an enormous amount of money in road maintenance,” he said. Osborn observed that nearly all mine transport was done by road at present and that the system could no longer take it. He cited what he termed the dreadful state of the Mufulira-Sabina road and the huge volume of traffic on the Kitwe-Chingola road as examples.

Mr Osbourn is correct in identifying that the poor state of the roads imposes costs on all road users and particularly raises the costs of transportation for mining companies. He is also correct to note that "nearly all mine transport was done by road at present and that the system could no longer take it". In short mining companies have destroyed our urban and inter-urban roads. However he is absolutely wrong to say "If government invested money on the railway system in the country, this would save the mining companies an enormous amount of transport cost". It does not make any economic sense whatsoever. Why would any person in their right mind ask the government to subsidise the damage that is being done by mining companies? The economic principle is the opposite. The polluter pays for the damage done, not to be rewarded!

“.....As it stands, the [road] repair and rehabilitation costs are borne entirely by the government and cease to be their problem. In the next three years, both Kitwe to Chingola road and the Kitwe to Lumwana road will be completely damaged.....All this heavy traffic combined with all other road users will place an extraordinary strain on all services, utilities and infrastructure....the combined Democratic Republic of Congo (DRC) and Zambian mines related freight volumes in 2010 would be 2,400 000 tonnes of copper ore per annum..... In Chingola, this will translate to having a truck on the roads every three minutes to and from. Roads in the town will become completely congested with the route between Chingola and Kitwe becoming almost impassable not to mention the hazardous conditions that will be faced by normal motorists and pedestrians".

The appropriate policy response is one we have been advocating since day one. We need to find creative ways in which new investment (mining and other sectors - it must be generic not sector specific) in the country can be tied to broader local investment in the transport sector. The model that is needed is similar to the framework that the UK has adopted under Section 106 of the Town and Planning Country Act (1995). This UK legislation basically makes it a condition that any new investment in any local area of the UK should be conditional on providing some minimum level of investment in schools, transport and other things, if the local authority deems necessary. The "nil-detriment" principle applies to inter-urban infrastructure under similarly supporting legislation (e.g. Section 278). Other nations have similar approaches. Failure to take this approach will result in road and rail network that mirrors our crippling electrical situation. As the IMF noted, Zambia's infrastructure is lagging behind the rate of investment. The economic principle here is simply one of polluter pays. The mining companies are destroying our roads more disproportionately than everyone else. They must bear the burden - not the government. In fact this should be easy to implement and something that would dramatically lead to empowerment of local communities.

It is the unbridled arrogance of the likes of Mr Osborn that we have this website. We must not entertain poorly thought out ideas from those sponsored by multi national corporations with little care for our people.

14 comments:

For the simple reason that the mines are in the mining business and not in the transport business. It would be like asking a baker to be in the engineering business as well (those who have worked in the business world would understand how unpractical these economic theories are). In your comment you omitted the second part of his sentence "and in turn save the government an enormous amount of money in road maintenance." Note that Mr. Osbourn is asking the government to "invest" in the railways and not in subsidising their (mines) roads damage. Investment implies expense recovery and profit making.

So, preferably either the government or another entity (possibly setup with the cooperation and investment of the government and mines) could invest in and run the railways. I do not work for the mines.

Thank you for your comments, which I find admittedly baffling. Let me see if I can address in the simplest way :

”For the simple reason that the mines are in the mining business and not in the transport business. It would be like asking a baker to be in the engineering business as well (those who have worked in the business world would understand how unpractical these economic theories are).”

To say that mining companies should not pay for damage they do the roads is because they are mining companies does not add much to the issue. The issue is not their trade. The question is whether their activities impose costs on the sector that is disproportionate.

I am quite surprised by your statement ”those who have worked in the business world would understand how unpractical these economic theories are”. Presumably you think that I, and many other economists have no knowledge of the business world. Do you think we operate in a non-business environment? In any case that is neither here nor there. In my article I make it clear two things. First that this must be generic – I quote “(mining and other sectors - it must be generic not sector specific)”. Secondly, if you can take time to study the UK model you will realise that is very practical and part of the planning system. It is not “theory” that is not applied. Thirdly, the principle of polluter pays is well established and is not as fictional as you may think. It underpins all government regulation in many countries. From environmental regulation, shipping, transport and yes mining in some countries.

”In your comment you omitted the second part of his sentence "and in turn save the government an enormous amount of money in road maintenance."”

The statement was redundant because the imperative was established in the first line which dealt with the need to reduce costs on the mining. To say government will save money is foolish because by spending on an externality that should appropriately be corrected through mining or other sectoral spend, no savings are possible. In short Mr Osbourn makes a different supposition to one I make, namely government increase revenue by minimising costs to mining companies. I say, mining companies are imposing costs which they need to correct, regardless of the extent of revenue from mining resources. Again an honest read of my post is clear that this is what underpin the differences.

”Note that Mr. Osbourn is asking the government to "invest" in the railways and not in subsidising their (mines) roads damage. Investment implies expense recovery and profit making.”

No Mr Osbourn is asking government to spend on infrastructure that should be spent by mining companies. He is asking government to implicitly subsidise not only the current costs they are imposing but to go further and convey wider benefits on mining companies. I think the point you are ignoring is the notion of “positive externalities”. Suppose mining companies were neutral and did not impose costs as I have suggested, it would still be wrong for government to ignore the fact that wider investment does not benefit the mines through positive spillovers. In such an environment, the principle for cost sharing would not be based on polluter pays, but beneficiary pays. Again these are things which are not theoretical. They are applied in many countries around the world that i have dealt with.

So, preferably either the government or another entity (possibly setup with the cooperation and investment of the government and mines) could invest in and run the railways. I do not work for the mines.”

Again, this misses the point. The issue here is that Mr Osborn ignores the external costs. It has nothing to with alternative infrastructure models. Also I have nothing against mining companies. As I have said, this is a generic issue. We should adopt the same approach to those building large malls. It is unfair to simply ask mining companies to bear their load.

I should also point out that their legitimate reasons or arguments one can develop against the model I have proposed e.g. the potential implications for mining revenue; philosophical problems related to double taxation; questions around the practicality of estimating damage; the viability of an adequate planning regime to support such a shift, etc.

I have not dealt with these because it would make for a long post. I was hoping to write a paper that sets these issues out in more detail, but alas too many things to do!

I was referring to Mr. Osbourn's suggestion that the government invest in railway infrastructure and which you referred to as "ask the government to subsidise the damage that is being done by mining companies?" when I made the comment about the mines being in the mining business rather than the transport business.

Speaking in terms of practical implementation, there are a number of mining companies in Zambia, and this raises the question of the amount each would be charged for constructing railway infrastructure (assuming the mines were responsible for their construction and operation). Would a new company with a large ore reserve not yet being mined be assessed a charge? And would a company with a large but diminishing production level be assessed a large fee. In terms of implementation and logistics this could be problematic. A study would need to be done on the economics of construction, rehabilitation and operations of a railway infrastructure for the mines. If there was just one mine, it would be easy to request it to build a railway. With many mines, the logistics are different and the role may better be handled by a different entity such as the government. In the meantime, I do not see a problem with assessing truck road usage fees for road maintenance.

"To say government will save money is foolish because by spending on an externality that should appropriately be corrected through mining or other sectoral spend, no savings are possible." Again, this spending is not spending on operating expenses. Rather it is investing, which indicates capital recovery and profit making. In other words, the government is constructing an asset (like Kariba dam). So it will possess an asset as well as reducing road maintenance costs.

My understanding is that this model is already being implemented actually by MINING companies. I read an impact assessment regarding one of the roads leading to the DRC constructed by MINING companies (government had no reason to) for copper ore imports, they are charging tolls to other companies! Nothing wrong with private tolling, I in fact support it up to a point, but we should recognise that such a principle is the same as the model above.

Now on the practicalities. You are right of course it is complicated where their multiple mines involved. You are also right that it is easier for road usage. I agree with the difficulties, but those are not insurmountable. For rail its a little complicated.

There are transport experts who can advise on these matters. On the road network the first thing you would need to do is estimate the level of "background demand" i.e. without mining companies level of traffic. Then you can work out how much they are contributing and what that would mean with widening the road or new roads. You then need to charge them for that over time. When you have tolling its a little more complicated!

I should note also that I share a somewhat different view on this from others like MrK. My view is that we need to ensure mining companies pay the local costs they impose FIRST before worrying about hiking taxes etc. Principle of justice demands the local impacts are neutral before turning to wider issues of "mining rights". If after correcting for local impacts we found that mining companies can't should have very little tax to remain profitable, that is fine.

Oh, in the UK the model is used largely for new housing and commercial supermarkets for local roads.

For inter-urban infrastructure it is used for large investments like football stadiums, airport developments and other things.

Basically the authorities estimate how much is need to undertake road or rail improvements and the others cough up. For rail it is tricky because of REVENUE!! Who gets the funding pot is a tricky question. So I would say since Zambia has no EXISTING rail infrastructure, we should be looking at this as a road related problem.

Osborne,I believe, was only pointing out that road transport is expensive to both the mine operators and the government. Transporting copper or other mine inputs by road is costly for the mine operators as opposed to transporting by say rail transport. On the part of government, the cost comes in maintaining the road network. So Osborne is only pointing out that if there is no investment in rail transport, then government should consider the costs incurred by mining firms in the form of increased transport costs when asking for tax. Rather than just look at the price of copper on the world market, government should also consider the expenses mining firms are facing.Thats my understanding of him.

That indeed may be your understanding and it must be respected. But as I have noted his comments come from a mistaken presupposition that transport costs generated by mining companies should be borne by government either through lower taxation or by constructing new capacity. I think that is the wrong mindset and reeks of supreme arrogance. Here we have these companies emitting fumes and damaging our roads and the only thing he can think about is how government ought to remedy the situation. Well government can do just that by adopting a Pigouvian mindset instead. Those that cause damage must bear the burden. Not the other way round.

I should add that this is where I think Zambia is failing. The lack of adherence to well tested economic principles in its formulation of policies. This is an area that any new government post 2011 must begin to address. We need better principles for policy making. Otherwise every chap will declare themselves lord of the manor.

Chola, your piece makes perfect sense to me, a lay reader; why should any commercial enterprise which heavily uses the infrastructure of a country, not help with any investment in the future of that infrastructure?

Is it really correct to blame the mining companies for road damage caused by transporting minerals, to condemn this as ‘pollution’ (dirty word), and to demand that the mines be taxed more heavily to compensate for it? How about the trucks that carry loads to the Congo? Should not the owners of their loads also be taxed in proportion to the damage they do? And what of the very principle of taxing the owners of commodities to pay for the damage done by transporting them?

How about the hauliers? Surely they are the ones to be taxed, not the owners of their loads, who can be difficult to identify. The hauliers will, of course, react by raising their haulage charges, so the owners of the contents will pay indirectly, but on a fair basis.

Nor should we look to creating new taxes. The answer surely is to increase road taxes, based on carrying capacity. What must be done is to ensure that the road tax does not just go into general revenue, but is firmly earmarked for road building and maintenance, which must in turn be properly supervised to ensure value for money.

We need to find creative ways in which new investment (mining and other sectors - it must be generic not sector specific) in the country can be tied to broader local investment in the transport sector.

Therefore no one is suggesting this is focused on mining. Indeed it would be wrong to specifically focus on mines.

That said, the level of correction must be aligned with the level of damage. It is possible that we may ignore background demand because it is negligible. That is perfectly acceptable.

On taxes :

The principle here is not a Pigovian tax. The principle here is simply as sammymole contribution towards investment. In short funding towards incremental capacity or maintenance to offset their costs.

You raise the question regarding Congo ore. My understanding is that a few of the roads on the border are done by mining companies and they have some form of tolling for non-ore carrying trucks. I read an Impact Assessment on this.

I think Murray poses an interesting argument by introducing haulage firms into the mix.

The fact of the matter is that a hugely significant of road damage in Zambia comes about as a result of their poor construction and overloading of trucks by haulage companies.

Regulation for both of these is the sole responsibility of government and its agencies. Yet, the ugly head of corruption has meant that the rules and procedures are not adhered to and we are left with infrastructure in a state of disrepair while we argue about who should pay for its replacement.

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